A new approach of the European Commission on aids given to banks for restructuring

The European Commission has recently adopted a Communication explaining its approach to assessing restructuring aid given by Member States to banks, according to a press release of the institution. This approach relies on three fundamental principles: i) banks which received state aid must become viable in the long run without receiving further state aid; ii) aided banks and their owners must carry a fair burden of the restructuring costs; and iii) measures must be taken to limit distortions of competition in the Single Market. The guidelines, which are in force until December 31st, 2010, explain in particular how the Commission intends to apply these principles in the context of the current systemic financial crisis, with a view to contributing to the return to viability of the European banking sector. The guidelines, which are in force until December 31st, 2010, explain in particular how the Commission intends to apply these principles in the context of the current systemic financial crisis, in order to help restore the viability of the European banking sector.

Competition Commissioner Neelie Kroes said: "The financial crisis may not be over yet, but we need to start working seriously with Member States in order to restructure European banks. We need to make banks viable again without state support and to rekindle competition in the Single Market. The guidelines adopted today will be a useful tool for banks and Member States by explaining the criteria the Commission will apply to restructuring aids for banks in the current period. It complements our previous recommendations of the Commission on state guarantees, recapitalization and the treatment of impaired assets".

• State aids in case of serious economic disturbances

The commission is now facing a large number of individual bank restructuring cases, following the restructuring aids granted to various banks, subject to their submission of a restructuring plan within six months.

In order to encourage transparency, predictability and equality of treatment between Member States, the Commission has issued guidelines to clarify its approach, the criteria it will use in its evaluation and the type of information required to guide this assessment. These guidelines are based on Article 87 paragraph 3 letter b) of the EC Treaty, which authorizes state aid in case of a serious disturbance in the economy. They will be temporary and applicable until the end of 2010. After that date, the normal rules on rescue and restructuring, based on Article 87.3c) of the Treaty (aid for the development of certain economic activities or areas where such aid does not adversely affect trading conditions to an extent contrary to the common interest) should resume.

• Governments must receive fair compensation for aid provided

In this context, the Communication emphasizes that in order to devise strategies for a sustainable future, banks will have to stress test their business. This requires an assessment of banks" strengths and weaknesses, which may lead to revisiting their business models, disclosing and dealing with impaired assets, withdrawing from loss-making activities or even considering absorption by a viable competitor or orderly winding up.

The Communication makes clear that aided banks and their capital holders must bear adequate responsibility for their past behavior and contribute to the reorganization of the bank as much as possible with their own resources. This requires in particular that the state is correctly remunerated for the aid it gives. Where this is not possible immediately due to market circumstances, such burden-sharing will be required at a later stage.

The Communication also reviews the distortions of competition resulting from the state aid to banks and presents measures to limit their effects. Distortions may come from prolonging the bank"s inadequate or excessively risky past behavior and/or from maintaining its market presence to the detriment of competitors. Large state support may require some adjustments including structural measures, such as divestitures (which can be spread over a number of years in the current crisis), or behavioral measures, such as constraints on acquisitions or on aggressive pricing and marketing strategies funded by state aid. Given the number of simultaneous restructuring cases, this analysis will pay particular attention to national market structures, in order to preserve the integrity and contestability of the Single Market.

Given the number of simultaneous restructuring cases, this analysis will focus mostly on national market structures, in order to preserve the integrity and competitive potential of the Single Market.